Mind the Gap-Upturn in corporate profits may not be sustainable

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http://www.cfo.com/article/1,5309,11295|0|M|766|,00.html
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Ronald Fink, CFO Magazine
December 01, 2003

"Is the recent upturn in U.S. corporate profits likely to last? Unfortunately, a new study comparing trends in cash flow with those in earnings for the largest blue-chip companies provides ample reason for doubt.

The study, by the Financial Analysis Lab at the Georgia Institute of Technology's DuPree College of Management, found a troubling gap between cash flow from operations and operating income last year for the 87 nonfinancial members of the S&P 100. DuPree found that the difference between operating cash flow and income last year for the median company in the group was almost 12 percent greater than average for the three years that ended in 2002.

While a small gap of this sort (which DuPree terms a company's excess cash margin, or ECM) is not necessarily a troubling sign (whether positive or negative), a positive ECM in double digits reflects a heavy dependence on improvements in working capital and other boosts to cash flow that aren't sustainable, simply because such gains aren't generated by the growth of a company's underlying business operations."

[mhr]

1. So The BFEE Economic Miracle Is Smoke And Mirrors After All!

eom

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2. More of that fancy accounting...

And we mere mortals must shut up and continue to invest in the stock market.